Option Pricing Using Variance Gamma Markov Chains

This paper proposes a Markov Chain between homogeneous Lévy processesas a candidate class of processes for the statistical and risk neutral dynamicsof financial asset prices. The method is illustrated using the variance gammaprocess. Closed forms for the characteristic function are developed and thisrenders feasible, series and option prices respectively. It is observed inthe statistical and risk neutral process is fit to data on time period of4 to 6 months in a state while this reduces to month for indices. Risk neutrallythere is generally a low probability of a move to a state with higher moments.In some cases this is reversed.     

Efficient estimation of general dynamic models with a continuum of moment conditions

There are two difficulties with the implementation of the characteristic function-based estimators. First, the optimal instrument yielding the ML efficiency depends on the unknown probability density function. Second, the need to use a large set of moment conditions leads to the singularity of the covariance matrix. We resolve the two problems in the framework of GMM with a continuum of moment conditions. A new optimal instrument relies on the double indexing and, as a result, has a simple exponential form. The singularity problem is addressed via a penalization term. We introduce HAC-type estimators for non-Markov models. A simulated method of moments is proposed for non-analytical cases.     

Optimal Indirect and Capital Taxation

We consider an environment in which agents' skills are private information and follow arbitrary stochastic processes. We prove that it is typically Pareto optimal for an individual's marginal benefit of investing in capital to exceed his marginal cost of doing so. This wedge is consistent with a positive tax on capital income. We also prove that it is Pareto optimal for the marginal rate of substitution between any two consumption goods to equal the marginal rate of transformation. This lack of a wedge is consistent with uniform taxation of consumption goods within a period.     

Conditional accounting conservatism and future negative surprises: An empirical investigation

We investigate whether conditional accounting conservatism has informational benefits to shareholders. We find some evidence that higher current conditional conservatism is associated with lower probability of future bad news, proxied by missing analyst forecasts, earnings decreases, and dividend decreases. Second, we find weak evidence that the stock market reacts stronger (weaker) to good (bad) earnings news of more conditionally conservative firms. Thus, we provide additional evidence that conditional conservatism affects stock prices.     

Social context reveals gender differences in cooperative behavior

A number of previous researches indicate that men prefer competition over cooperation, and it is sometimes suggested that women show the opposite behavioral preference. In the current study the effects of social context on gender differences in cooperation are investigated. For the purpose, we compared men and women behavior under two social conditions: in groups of strangers and in groups with long-term socialization—groups of friends. The differences were found in changes in the level of cooperation, taking into account the effects of mixing social and gender variables. Social interaction and communication made cooperation of group members strength and sustainable. However, men’s and women’s cooperative behavior in groups differed. Women were initially more inclined to cooperate in interaction with strangers. Men showed greater sensitivity to sociality effects. They tended to make cooperative decisions more often if there were friends in the group. Furthermore, men cooperated with previously unknown people after socialization with them significantly more than women.     

How do auditors view managers’ voluntary disclosure strategy? The effect of earnings guidance on audit fees

The objective of this study is to examine the relation between attributes of earnings forecasts issued by managers and audit fees. Although there is an extensive literature on managers’ disclosure of earnings forecasts, there is a paucity of research on how auditors incorporate information from these voluntary disclosures. We find that the issuance of an annual or quarterly management earnings forecast in the prior period is positively associated with the current period audit fees. Our results indicate that on average, audit fees are higher by about 7% for firm-years associated with an annual forecast. Among the firms that issue earnings forecasts, we find no association between audit fees and likelihood of updating a previously issued earnings forecast, indicating that auditors do not view such behavior negatively. Further, we find audit fees to be positively associated with the error and the bias (or optimism) in the forecasts for annual forecasts but not for quarterly forecasts. Overall, these results suggest that management’s forecast behavior captures higher business risk for the auditor via greater risk of earnings management or litigation risk.     

Conditional risk and performance evaluation: Volatility timing, overconditioning, and new estimates of momentum alphas

Unconditional alphas are biased when conditional beta covaries with the market risk premium (market timing) or volatility (volatility timing). We demonstrate an additional bias (overconditioning) that can occur any time an empiricist estimates risk using information, such as a realized beta, that is not available to investors ex ante. Calibrating to U.S. equity returns, volatility timing and overconditioning can plausibly impact alphas more than market timing, which has been the focus of prior literature. To correct market- and volatility-timing biases without overconditioning, we show that incorporating realized betas into instrumental variables estimators is effective. Empirically, instrumentation reduces momentum alphas by 20-40%. Overconditioned alphas overstate performance by up to 2.5 times. We explain the sources of both the volatility-timing and overconditioning biases in momentum portfolios.     

Power fluctuations and political economy

We study (constrained) Pareto efficient allocations in a dynamic production economy where the group that holds political power decides the allocation of resources. For high discount factors, the economy converges to a first-best allocation where labor supply decisions are not distorted. For low discount factors, distortions do not disappear and fluctuate over time. Most importantly, the set of sustainable first-best allocations is larger when there is less persistence in the identity of the party in power (because this encourages political compromise). This result contradicts the common presumption that there will be fewer distortions when there is a “stable ruling group”.     

Productivity,Scale and Efficiency in the U.S. Textile Industry

In this paper we employ panel data techniques to address several issues related to the recent performance of the textile industry. We build on the research and results obtained by Ramcharran (in Empirical Econ 26:515–524, 2001) for the textile industry as a whole, by extending the analysis to the sector level. Using data for 23 sectors over 39 years (1958–1996), we estimate a variable elasticity of substitution (VES) production function; the results allow us to construct time-series of marginal products of inputs and elasticities of scale and substitution. We find evidence in support of the use of a VES function and conclude that there are systematic differences among textile sectors’ productivity and performance.     

Does a Seller’s eCommerce Reputation Matter? Evidence from eBay Auctions

With internet commerce, a buyer cannot directly examine the product and so must rely upon the accuracy and reliability of the seller in deciding whether and how much to bid. In this setting, the seller's reputation can become an important factor in the bid. This paper examines the impact of the seller's reputation on the willingness of buyers to bid on items sold via internet auctions, using a 1999 mint condition U.S. $5 gold coin whose average price was $32.73. The empirical results show that the seller's reputation has a positive, statistically significant, but small impact on the price.